Trade Remedies - CVD .docx

CLASS 4: COUNTERVAILING MEASURES QUESTIONS: What is a subsidy? A1 of SCM contains a definition of the term “subsidy”. The definition contains three basic elements: (i) a financial contribution (ii) by a government or any public body within the territory of a Member (iii) which confers a benefit. All...

CLASS 4: COUNTERVAILING MEASURES QUESTIONS: What is a subsidy? A1 of SCM contains a definition of the term “subsidy”. The definition contains three basic elements: (i) a financial contribution (ii) by a government or any public body within the territory of a Member (iii) which confers a benefit. All three of these elements must be satisfied in order for a subsidy to exist. What is wrong with subsidies? Sometimes they are economically rational On the other hand – Cause distortion in the global market Positive externalities that are not captured – ie. Climate Change What is specificity and why is it important? Assuming that a measure is a subsidy within the meaning of the SCM Agreement, it nevertheless is not subject to the SCM Agreement unless it has been specifically provided to an enterprise or industry or group of enterprises or industries. The basic principle is that a subsidy that distorts the allocation of resources within an economy should be subject to discipline. Where a subsidy is widely available within an economy, such a distortion in the allocation of resources is presumed not to occur. Thus, only “specific” subsidies are subject to the SCM Agreement disciplines. There are four types of “specificity” within the meaning of the SCM Agreement: Enterprise-specificity. A government targets a particular company or companies for subsidization; Industry-specificity. A government targets a particular sector or sectors for subsidization. Regional specificity. A government targets producers in specified parts of its territory for subsidization. Prohibited subsidies. A government targets export goods or goods using domestic inputs for subsidization. Why does the WTO Agreement allow countervailing action to be taken against subsidized imports? How is the amount of a countervailable subsidy calculated? How are subsidies allocated over time, products, and markets? What special issues are presented by economies characterized by a high degree of state involvement in the economy? Overview of CVD Countervailing duties or CVDs are tariffs on imported goods that are imposed to offset subsidies given by the exporting country's government. CVDs help offset any negative domestic impacts that producers of the same good might experience due to foreign competition, who in this case, would receive a subsidy to export the same good. The WTO only permits countervailing duties to be charged after the importing nation has conducted an in-depth investigation into the subsidized exports. CLASS NOTES Positive Externalities: ie. Solar Panels Value to solar that goes beyond the calculation a consumer makes about daily products [ie. gas] Externalities associated with low carbon footprint Market distorting if the producer does not take into consideration the extensive cost beyond the production and consumer cost – Limited responsibility, negative externalities that the producer has not internalized [Market Failure] WTO recognizes that subsidies can be good for social, environmental reasons Subsidies change the nature of competition between trading partners State Aids Regime – WTO agreement on Steroids Push the Single Market Agreement for CVD, AD etc – All for Trade Remedies Where there is a physical trade in goods [tangible objects] Has to be targeted Threaten to cause injury Unilateral Measure taken by a country but within the legal framework You can impose AD and CVD on the same imports UREA Ammonium – Two Parts Dumped fertilizer into the US [Article 1 of the SCM] Subsidizing those imports into the US [Article 2 of the SCM] Exporters: ACRON + EUROCHEM Single biggest input into fertilizer = Natural Gas State Owned Producers: e.g. The Gas company Regulated heavily by the Russian Government Therefore, is the Russian Government providing subsidized gas to the fertilizer companies 1st – Identify who the major exporters are 2nd – Collect information to see whether they are receiving subsidies Calculating – Are they receiving a subsidy right now? A: POI Questionnaire has to given periods of time; ie. can’t provide information for the past 25yrs but also can’t provide information for transactions that are yet to occur Often use a ‘snapshot’; period of investigation that is typically 1yr for AD and CVD investigations Was there unfair trade practices during this period – ie. was there a subsidy or was there dumping Who’s going to get the questionnaires? The government [they’re providing the subsidy] Those receiving the subsidies [the exporters] LOGIC OF GEORGETOWN STEEL Important for the idea of BENEFIT under A1: is the gov intervention distorting the market [ie. the Canada-Aircraft definition of benefit] ITA: NME’s are riddles with distortions in the market, “a subsidy can have no meaning in an economy that does not have true market forces” Asking Congress to determine the market price in an NME is too difficult There isn’t a market – therefore it’s hard to distinguish between Command Economy that is controlled by the state Special Rules – Ignore that market and look at another un-manipulated economy to gather whether there are subsidized imports State Attribution + Public Body is extremely difficult in cases where the state owns most of the actors in the market Non-Market Economy – All prices are determined by the state Flexibility COUNTERVAILING DUTY LAW CVD is only relevant when there is existence of a subsidy that is affecting domestic imports – Limited scope CVD Subsidised Imports [Existence of a Counter Valuable Subsidy] Material Injury Causation Remedy = DUTY CVD – ‘offset’ imports that are being subsidized by foreign governments Counter-vail the effect of subsidies Subsidized Imports Injury/ Causation [subsidized imports are causing injury to domestic markets] CVD + AD = Both measures that are intended to off-set unfair trade practices (e.g. Unfair pricing behavior) Only Remedy for Anti-Dumping is if there is existence on dumping into your country US + EU w/ Boeing and Airbus Harm Caused to your export market; Cause of Action for Serious Action – 3rd Party There has to be COUNTERVAILABLE SUBSIDIES – Ie. Specific Subsidies Article 1 = Defines a subsidy Financial Contribution – WHAT Govt./ Public Body/ Entrustment-Determination – By WHOM Benefit – “benefit is thereby confirmed” What is being regulated is the behaviour of governments Article 2 = Specificity [Targeted] Article 14 = Calculation of the benefit Background Effect of the CVD is to remove the benefit of the subsidy by “countervailing” it – offsetting it – at the border Rather than prohibit the practice of assessing CVDs on subsidized imports, the GATT negotiators adopted Article VI, which authorizes CVDs as an exception to the MFN requirement. However, GATT/WTO members can only take advantage of this exception if they follow the specific rules spelled out in Article VI. To qualify, the following principles must be followed: the CVD cannot be in excess of an amount equal to the estimated bounty or subsidy determined to have been granted on the manufacture or production or export of a product. must demonstrate that the effect of the subsidy is such as to cause or threaten material injury to the domestic industry producing the like product in the importing country. Article VI is NOT a roadmap, and leaves ample room for interpretation: how to calculate the “amount” of the bounty or subsidy? What is meant by material injury? In the Tokyo Round, concluded in 1979, the GATT Parties negotiated a “code” that attempted to resolve many of these ambiguities. This Code was further refined and enlarged in the Uruguay Round – now known as the Agreement on Subsidies and Countervailing Measures (“SCM”). (Annex 3.) The CVD laws of WTO members must conform to the SCM. SCM calls on WTO Members to refrain from all export subsidies, and to avoid domestic subsidies that are the cause of serious prejudice US law was amended by Uruguay Round Agreements Act of 1994 to reflect the new subsidy obligations, including extension of the injury test to all subsidy investigations involving products from WTO members What’s wrong / ok with subsidies? See page 54 in CLN What is a subsidy According to the SCM Agreement, a subsidy is: a financial contribution by a government. [DTF = Direct Transfer of Funds] This can take many forms: direct grant of money or goods tax concessions low-interest loans Equity Infusion [Ownership Stake- Claim on the profits] Potential Direct of Transfer of Funds [loan guarantee] confers a benefit on the recipient grant loan at below-market rates: “benefit” is essentially a “preference.” Definition of subsidy under SCM is substantially similar to the definition that had evolved under US law prior to Uruguay Round Procedures before the WTO complaining country must convince panel that the contested action of the other country is contrary to the sCM Export subsidies are prohibited Therefore, only need to prove the existence of the export subsidy No injury or serious prejudice need be shown Domestic subsidies are not per se prohibited Only actionable if they are shown to cause adverse effects to the interests of any other member Art 5 of SCM – page 444 in CM Adverse effects include Injury to the domestic industry Nullification or impairment of benefits under GATT Serious prejudice (as defined in Art 6) Where adverse effects are found by a panel, the domestic subsidy is actionable and the WTO remedies are available. The fact is that proving these adverse effects before a WTO panel is exceedingly difficult. Hence, the WTO procedure is rarely used to challenge subsidies. See SCM Art 4 on page 443 of CM US countervailing duty law U.S. law authorizes any person that is adversely affected by imports that are believed to benefit from subsidies to file a CVD petition at DOC and ITC. Both agencies proceed according to strict timelines (similar to earlier handout). After petition is filed: DOC is responsible for investigating the allegation that there is a subsidy ITC is responsible for evaluating injury (or threat) to the industry There are two types of subsidies under SCM and US law Those that are contingent on export performance and all others See above Also see US law on definition at page 150 in CM Regional specificity See page 156 in CM Benefit to Recipient in general, DOC presumes that the benefit issue is resolved so long as there is a benefit at the moment of receipt. Under this approach, no effort is made to determine if the subsidy actually benefits the recipient after the date of receipt. (i.e., a piece of new equipment that never works) Injury is required in every case Alternative Procedure to Challenge Subsidies Before the Commerce Dept and WTO US law now provides that an “interested party” may ask the Commerce Dept to determine if there is reason to believe that merchandise produced in a WTO member country is benefiting from a prohibited subsidies If Commerce makes affirmative determination, it notifies USTR that a subsidy has been found USTR will then determine whether to challenge the subsidy by initiative dispute resolution before the WTO This is a discretionary decision and USTR may dcline to initiate dispute resolution for any reason In the event USTR declines to act, the requesting US industry has no recourse other than to file a regular CVD petition. Application of US CD law to NME see CM page 183 Privatization key issue here is whether, when a company who received past subsidy from govt and then sells all assets for FMV to third party, the CVD is continued to be applied against new owner lots of litigation and back and forth see pages 59-61 in CLN final word from CAFC a person must benefit from a subsidy before a CVD can be applied to that person. Therefore, if new owner paid full value for the assets, it could not have received any benefit from the prior owner’s subsidies. WTO decision in 2002 WTO Panel said arm’s length sale at fair market value will, by itself, terminate the benefit of the prior subsidy. WTO Appellate Body said that the Panel went too far. Presumption that arm’s length sale at fair market value will terminate the benefit of the prior subsidy – BUT this can be rebutted. In other words, there must be a case-by-case approach. CURRENT STATUS: effect of 2002 WTO decision has been to greatly limit the ability to show that subsidies continue after a privatization, if it is an arm’s length sale for fair market value Baseline presumption: non-recurring subsidies can benefit the recipient over time, even after a change in ownership. However, rebut by showing: privatization – sold all or substantially all of a company OR its assets, retaining no control of the company or its assets, in a sale that was an arm’s length transaction for fair-market value. DOC intends to analyze whether the sale was at fair market value, based on factors. (this seems very difficult – used car?) And, EVEN if the sales price is at market value, the party alleging the subsidy can show that market conditions were severely distorted by the government, which in turn altered the transaction price. (market economy? Collusion? Distortion?) In sum: This is a case-by-case analysis. Privatization will extinguish subsidies, but with several catches and tests. (2) PUBLIC BODY DS379 – China China was upset with the US’s investigation for imposition of a CVD They argue that the commerce department did not define subsidy as to Article 1 of the SCM Huge case w/ China attempting to make it hard for countries like the US to bring CVD investigations PART 1 = WHAT Financial Contributions In Q State Owned/ Run Enterprises in China that were exporting Steel + Rubber [raw materials] Loans provided by the State owned commercial banks Ie. Loans from SOCB [State Owned Commercial Banks] + Inports SOE [State Owned Enterprises] A1(3) – Provision of “goods and services” are considered to be a financial contribution A1(i) – “loans” are financial contribution Services eg. TRANSPORTATION [Has to be attributable to the state and has to confer a benefit] PART 2 – WHOM HOLDING US and the Panel argued that these SOCB’s and SOF’s were OWNED/ CONTROLLED by the state Panel – Test was CONTROL If an entity is being controlled by a state, then the state can use it to provide subsidies just as easy Appellate Body Reversed: The Appellate Body reversed the Panel's finding that the term “public body” in Article 1.1(a)(1) of the SCM Agreement means “any entity controlled by a government”. The Appellate Body found, instead, that a public body is an entity that possesses, exercises, or is vested with, governmental authority. A company could be fully owned by the state but you still have not met your PB burden; have to show that it is vested w/ govt. authority How far out do you extend state responsibility? What is the relationship to the government And is the relationship such, that the behavior of these entities is attributable to the state [ie. State Attributions] Finding – Determination of the US Dept. of Commerce ruling Using the Vested Test… Loans SOCB – YES Inputs SOE – NO SOCB vs. SOE They looked at the evidence for both Clear they were both owned by the state Principle Evidence was the set of laws managing the banking systems in China [SOCB had to follow Chinese Gov. regulations when it came to lending- Legal obligations to respect the lending and borrowing of the Gov’s economic plan, had to follow certain public policy] Legal structures proved obligations of SOCB’s to follow public policy regulations To prove something is a PB – Need a smoking gun Need to show that they’ve been trusted/ legally bound to follow public policy From the US perspective – DS379 was a nail in the coffin for the Appellate Body (3) ENTRUSTMENT/ PRIVATISATION Spain 1970’s – Still under Franco Determination of public body for private actors was difficult [eg. BVV] CVD agreement – A1(4) “ A government makes payments to a funding mechanism, or entrusts or directs a private body to carry out one or more of the type of functions illustrated in (i) to (iii) above which would normally be vested in the government and the practice, in no real sense, differs from practices normally followed by governments” BENEFIT CONFERRED Article 14 – Calculation of the Amount of a Subsidy in Terms of the Benefit to the Recipient a loan guarantee by a government shall not be considered as conferring a benefit, unless there is a difference between the amount that the firm receiving the guarantee pays on a loan guaranteed by the government and the amount that the firm would pay on a comparable commercial loan absent the government guarantee. In this case the benefit shall be the difference between these two amounts adjusted for any differences in fees; Interest Rate is a big example of a benefit conferred (ie. interest free loan or lower IR) Need to know the IR in the market Credit rating of the company Time of the loan [longer the time, higher the uncertainty] Conditions of the loan COMMERCIAL BENCHMARK: In the case of a loan, how much that individual could gain on the regular market Commercial Benchmark for a Loan in China The state owns the commercial banks If you have a Chinese commercial bank making a loan and you need to see if it confers a benefit, you cannot look at other commercial banks in the Chinese market because they are all owned and controlled by the state Establishing that it is a subsidy is not enough, you need to prove how much the subsidy actually is Without the notional commercial benchmark, US looks at interest rates in other places “EQUITY INFUSION” – is the Govt. acting in the same manner as a private actor would [eg. Bailing out a company with the purchase of shares] Article 14: government provision of equity capital shall not be considered as conferring a benefit, unless the investment decision can be regarded as inconsistent with the usual investment practice (including for the provision of risk capital) of private investors in the territory of that Member; “GOVERNMENT REVENUE FORGONE” – eg. Taxes; Income, Property Eg. Companies getting tax breaks for locating their factory in a certain state Tax credit for installation of solar - Government providing a subsidy to encourage positive externalities; public policy Any situation where an economic actor owes money and the gov. lets them off SPECIFICITY [Article 2] Rule of 4 to Structure the Type of Measures that can be Specific: Specific to…. Enterprise/ Group Industry [to a sector of the economy- [eg. CHIPS Act with the Semiconductor industry] OR a Group of Industries Regions/ Specific Geographic Regions [Article 2.2 : Encouraging Econ Activity [Enterprise Zones- South side of Chicago] Prohibited subsidies. A government targets export goods [therefore specific] or goods using domestic inputs for subsidization. [Showing that the subsidy is contingent upon export performance ie. export credit, only exported products received the subsidy] What subsidies are actionable Specificity. Only subsidies that are “specific” are actionable. That is, the contribution must be given to one industry or group of industries, but not to all industries If specific by law, “de jure.” If in fact specific, then “de facto.” In the latter case, examine all facts and circumstances to see if in fact limited to a specific enterprise or industry. Export subsidies: Subsidies that are “contingent on export performance.” “Contingent on export performance” requirement: (Australian Leather – p. 132). Such subsidies are deemed to be specific and are expressly prohibited by SCM. The factual inquiry: Whether the subsidy is “in fact tied to actual or anticipated exportation or export earnings.” Note: in Australian Leather, the Panel found that the grant contract specified sales targets that – because of the size of the Australian market – could only be met by exports. Domestic subsidies: This is a term used to describe all subsidies (as defined in SCM and U.S. law) that are not export subsidies. Domestic subsidies are only actionable if specific within the meaning on Art 2 How do you address actionable subsidies SCM subsidy disciplines are enforceable by WTO member by two routes Dispute resolution by DSB of WTO US (or other country) CVD law private parties can utilize to address foreign subsidies QUANTIFYING THE SUBSIDY Coming up with a rate of subsidization for the imports coming into your country CVD Calculation – Are they receiving products that are too favourable one-time grant What is the allocation period? It is based on the average useful life of equipment used in the industry. For factory machinery, 15 years is common. To allocate the subsidy benefit, Commerce looks to the AUL Take portion of grant allocated to POI (previous year) and divide by total worldwide sales Then take that rate and apply to US sales So if you have $30M grant and AUL of 15 years, then amt of grant allocated to POI would be $2M. if total worldwide sales were $20M, then total CVD would be 10%. Then apply that 10% against all US sales CVD starts in year of petition?? Page 56 POI has to be a past period of time – eg. If you start the investigation in 2024, you would look at the calendar year of 2023 Can’t look at just the subsidies received during the POI – Have to look at previous subsidies that has an asset benefit Which sales and which market are receiving the benefit Which product is receiving the benefit NME’s with CVD Public Body What is the benchmark in a state dominated economy No data based answers Title 7 Title 232 ITA Link’dn [email protected] Spencer Neff